Study on the Fluctuation of Purchasing Power Parity

Abstract

This paper tests the effect of per capita income, exchange rate, foreign direct investment inflows, net trade condition index and the final consumption expenditure growth rate on the fluctuation of purchasing power parity basing on panel fixed effects model during the period of 2000-2013 of 62 countries (religions). Empirical results show that the fluctuation of per capita income and exchange rate are the key factors to explain the fluctuation of purchasing power parity, however, purchasing power parity (PPP) fluctuation is influenced by the five variables has some differences in terms of magnitude and direction between different economies. The effect of the foreign investment on purchasing power parity is negative in low income economies, but other economies are the opposite, at the same time, the estimated coefficient of high income is lower than upper & middle income economies. The growth of final consumption expenditure is helpful to improve the purchasing power parity of low income and high income economies. It is surprising that the increase in per capita income will reduce the purchasing power of some developed economies. In China, purchasing power parity will continue a growth trend in future.

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